COLLECTED WISDOM™ on 401k Hardship Withdrawals
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Hardship distributions are a valuable component of many 401k retirement plans. They encourage participation in the plan and provide a sense of security to participants as they seek a balance between retirement savings and current financial needs. But plan sponsors need to know the rules and administer hardship withdrawals carefully.
Loan and hardship withdrawals taken from workplace retirement plans in the third quarter of 2023 hit their highest levels in more than two years, according to a report from Empower. Among a study of 5.3 million defined contribution workplace savers in Empower accounts, 0.8% took hardship withdrawals in Q3, and 2.6% took out loans from their savings. Those were the highest rates in the past eight quarters.
Source: Planadviser.com, December 2023
The article answers this question, "Our 403b plan currently allows for hardship distributions, but the number of such distributions has been on the uptick in recent years. We don't wish to eliminate hardship distributions, but is there any way we can restrict their availability?"
Source: Plansponsor.com, November 2023
Employers may now establish policies and procedures allowing participants to self-certify that the hardship distribution is being made on account of a deemed immediate and heavy financial need. Employers are no longer required to collect documentation when approving hardship distributions, which should help streamline the hardship distribution process.
Source: Ascensus.com, October 2023
Years of experience have shown us that anytime Congress attempts to simplify the retirement plan rules, they often end up doing just the opposite. SECURE 2.0 is no exception, with many of the provisions purporting to make life easier while being far more convoluted than necessary. One area where they hit the mark, however, is concerning hardship distributions, and the SECURE 2.0 simplifications follow several others made in recent years.
Source: Dwc401k.com, October 2023
Hardship distributions can provide a lifeline when absolutely needed. Congress continues to pass laws allowing participants better access to their retirement accounts while actively working.
Source: Tri-ad.com, September 2023
Plan sponsors are weighing a new option to offer workers, in-plan emergency savings accounts. With the Secure 2.0 Act, Congress made non-highly compensated employees eligible for such benefits in plan years beginning after Dec. 31, 2023. Withdrawals from the accounts will have fewer restrictions than those from 401ks. The shift comes after workers made it clear they want additional financial support from employers, support that goes beyond a raise.
Source: Hrdive.com, August 2023
Employers may now rely on an employee's self-certification that they have experienced a hardship and that the employee has no other funds available to satisfy the hardship. Self-certification is only available for the first hardship request during a plan year. This sounds good, so what are the issues?
Source: Consultrms.com, June 2023
Plan sponsors of retirement plans with hardship withdrawal provisions have come to realize that complying with hardship rules is sometimes a hardship. Luckily, the SECURE 2.0 Act in Section 312 has provided relief to those plan sponsors that administer hardship withdrawals by relying on written certification.
Source: Belfint.com, May 2023
Life is a balancing act. Regulators strive to fight leakage by imposing penalties on early distributions, but they also don't want to add to legitimate unforeseen and extreme emergencies by imposing penalties when participants are in trouble. At the same time, regulators don't want to impose administrative burdens that would be a deterrent from offering a plan, so most of the new distribution options are optional.
Source: Belfint.com, April 2023
SECURE 2.0 has provided several opportunities for plan administrators to assist participants in tackling emergency expenses. Two of these provisions updated the administration of hardship withdrawals to plan participants.
Source: Graydon.law, March 2023
Newly released data from year-end 2022 shows that the volume and dollar amount of 401k loans and hardship withdrawals decreased, but there were some nuances to the findings. In a new quarterly report that draws on data from more than three million 401k plan participants, Bank of America's 401k Participant Pulse report reveals that fewer participants took hardship withdrawals for immediate financial needs.
Source: Napa-net.org, February 2023
Among the many changes within SECURE 2.0 is increased flexibility for participants to access certain retirement plan accounts when faced with qualifying emergencies, hardships, and disasters.
Source: Benefitslawadvisor.com, February 2023
Inflation and higher prices overall are causing more Americans to take 401k hardship withdrawals. The Wall Street Journal, citing Vanguard research, reported that a record 2.8% of the five million people in 401k plans run by the investment behemoth tapped their retirement savings in 2022 for financial hardship reasons. It's an increase from 2.1% in 2021 and a pre-pandemic average of about 2%.
Source: Napa-net.org, February 2023
Hardship withdrawals from retirement accounts are on the rise, and advisors, investors, and plan administrators need to know the options. Spiking inflation coupled with a sinking stock market has forced more investors to tap their retirement savings for cash. Fiona Greig, a leading expert in household finance, has a front-row seat to the unfolding crisis in her position as the global head of investor research and policy in Vanguard's investment strategy group.
Source: Investmentnews.com, January 2023
More Americans are tapping their 401ks for financial emergencies, with the percentage of retirement savers pulling money for hardships spiking 24% in the 12 months through Sept. 30, according to new data.
Source: Investmentnews.com, November 2022
Can a hardship request cover costs directly related to the purchase of a principal residence for the employee including the payoff of outstanding debts if that is what is required for the participant to qualify for the mortgage loan? Experts from Groom Law Group and CAPTRUST answer the question.
Source: Plansponsor.com, November 2022
Can Participants Certify Electronically That They Have a Financial Need for Which a Hardship Distribution Can Be Made?
If you carefully follow a procedure authorized by the IRS in 2017, your plan could elect to have participants provide summaries instead of the source documents that substantiate their immediate and heavy financial needs. This article outlines the procedure and then reviews the rules that led to your current practice.
Source: Thomsonreuters.com, October 2022
Given the current economic climate, a greater number of participants may be requesting hardship distributions from their retirement plans. To avoid jeopardizing the qualified status of the plan, employers and plan administrators must follow both the plan document and legal requirements before making hardship distributions. Some retirement plans, such as 401k and 403b plans, may allow participants to withdraw from their retirement accounts because of a financial hardship, but these withdrawals must follow IRS guidelines.
Source: Irs.gov, September 2022
Do specialists have a list of the types of expenses for which distributions are deemed to be made on account of an immediate and heavy financial need from a 401k/ 403b plan under the hardship withdrawal rules? Experts from Groom Law Group and CAPTRUST answer the question.
Source: Plansponsor.com, September 2022
Over the past few years, several laws and regulations were passed to loosen rules on hardship distributions for 401k and 403b retirement plans. While there was an extension to give plan sponsors more time to revise plans to reflect the changes, the final day to amend pre-approved qualified retirement plans that adopted hardship distribution regulations is Dec. 31, 2021.
Source: Bdo.com, November 2021
The IRS has updated its "Issue Snapshot" summarizing the requirements for Hardship Distributions From 401k plans. These latest updates incorporate changes made by the Bipartisan Budget Act of 2018. The updated issue snapshot exclusively focuses on the current rules and foregoes virtually all mention of the restrictions that applied to hardship distributions before 2020, which is before the effective date of the amended regulations.
Source: Hallbenefitslaw.com, October 2021
Though research from Vanguard determined that retirement plan loan and hardship withdrawal activity decreased in 2020, experts say employers should consider enacting procedures to limit retirement plan distributions while still offering help to their participants in emergencies. Plan sponsors should educate their employees about distributions, and they can help their workers set up emergency savings accounts to avoid tapping into retirement funds.
Source: Plansponsor.com, August 2021
The IRS has updated its "Issue Snapshot" summarizing the requirements for hardship distributions from 401k plans. These latest updates to the snapshot on hardship distributions incorporate changes made by the Bipartisan Budget Act of 2018, which expanded the sources of funds for hardship distributions, removed the requirement for participants to exhaust available plan loans, and directed the IRS to delete the safe harbor requirement that elective deferrals and employee contributions be suspended after a hardship distribution.
Source: Thomsonreuters.com, July 2021
A 401k plan may permit the distribution of certain contributions (and attributable earnings) on account of an employee's hardship, but only if made following rules contained in the regulations under IRC Section 401(k). This Snapshot examines the criteria for current hardship distributions.
Source: Irs.gov, June 2021
During difficult economic times, you may be tempted to tap into your financial future by taking a loan or a hardship withdrawal from your workplace retirement plan. But is it a good idea? Individual circumstances vary, so there is no simple answer to this question. This piece takes a closer look.
Source: Axiaadvisory.com, June 2021
Hardship Distributions: What Retirement Plan Sponsors Need to Know About Complying With Recent Changes
Efforts to keep up with the myriad of challenges that retirement plan sponsors faced in 2020 may have caused some to overlook significant changes related to hardship distributions that were enacted before the onset of the COVID-19 pandemic. Now is the time for plan sponsors to examine whether they are complying with these changes in how they administer their plans and whether their plan documents accurately reflect these changes.
Source: Bdo.com, March 2021
Self-certification facilitates automation of the hardship approval by the recordkeeper. However, electronic approval of hardship distribution requests through the plan website is not always the default. Thus, there continue to be instances in which neither backup nor compliant self-certifications were obtained for hardship distributions. Unfortunately, self-certification does not mean that an email or a phone call from the participant is sufficient.
Source: Belfint.com, January 2021
The economic strains occasioned by the pandemic have had wide-ranging effects, and one of the actions put in place is to ease the rules concerning hardship withdrawals and loans. But availability has not made them a widespread response to economic challenges, recent studies have found. Loan and hardship distribution usage were relatively low in 2019, says T. Rowe Price in its Reference Point Annual Benchmarking Report. They report that while hardship distributions did grow in 2019, they only did so by 1.5%. They attribute the low levels to improved market conditions.
Source: Asppa.org, July 2020
Low- to moderate-income retirement plan participants have mostly turned to reducing their spending levels and using credit cards to find financial relief during the pandemic; however, more will be turning to their retirement plans for liquidity, according to research from the nonprofit Commonwealth and the Defined Contribution Institutional Investment Association Retirement Research Center.
Source: Planadviser.com, July 2020
IRS Expands Definition of Qualified Individuals for Purposes of CARES Act Plan Distributions and Loans
On June 19, 2020, the Internal Revenue Service released Notice 2020-50 to help retirement plan participants affected by COVID-19 take advantage of the CARES Act provisions providing enhanced access to plan distributions and plan loans. Among other provisions, Notice 2020-50 expands the categories of individuals eligible for CARES Act distributions and loan treatment.
Source: Clarkhill.com, June 2020
This IRS notice provides guidance relating to the application of section 2202 of the CARES Act for qualified individuals and eligible retirement plans. The guidance in this notice is intended to assist employers and plan administrators, trustees and custodians, and qualified individuals in applying section 2202 of the CARES Act, including guidance on how plans may report coronavirus-related distributions.
Source: Irs.gov, June 2020
If an affected taxpayer makes a qualified COVID-19 withdrawal, the funds are not limited to COVID-19 related expenses such as medical bills. They can be used for any purpose, such as food, rent utilities, paying off credit cards or helping another family member or any other purpose for that matter. The CARES Act is fairly broad as to who qualifies for a COVID-19 related hardship distribution.
Source: Belfint.com, April 2020
The Federal Emergency Management Agency has declared several disaster areas around the United States as a result of the spread of the coronavirus. Under final regulations issued in 2019, a federal disaster declaration has become one of the safe harbor reasons that qualifies a 401k or 403b plan participant for a hardship distribution, so it appears that plan participants may now be able to take a hardship withdrawal if they are laid off, put on an unpaid leave of absence or incur other expenses and losses on account of COVID-19.
Source: Beneficiallyyours.com, March 2020
The new provision is optional, so plan sponsors will need to amend their plans to permit QBOADs and, as a separate option, to permit the repayment of QBOADs. Although discretionary plan amendments are due by the end of the plan year in which they take effect, the SECURE Act provides that plan amendments for its changes will not be due before December 31, 2022, for calendar year plans, or the last day of the first plan year beginning on or after January 1, 2022, for fiscal year plans.
Source: Belfint.com, March 2020
This multi-video series will provide a snapshot of retirement-related SECURE Act provisions, included in the Further Consolidated Appropriations Act, 2020. This video covers qualified birth or adoption distributions.
Source: Ascensus.com, March 2020
One way that employers can assist employees faced with coronavirus-related costs and expenses today (no Congressional action or immediate employer action required) is that employers can permit employees to take hardship withdrawals from their 401k plan accounts to meet coronavirus-related expenses. The employee will still need to meet the requirement that the distribution is necessary to satisfy the financial need. There are two possible mechanisms for permitting these hardship withdrawals.
Source: Stevenslee.com, March 2020
While the rules on resuming deferrals after a hardship distribution have recently been relaxed, we are in a bit of a transition period through the middle of 2020 where the correct way to handle situations like this can be a bit confusing. The answer varies based on timing and decisions.
Source: Dwc401k.com, February 2020
For 401k plans that permit hardship distributions, the rules changed, beginning on January 1, 2020. Make sure that your plan sponsors clients are administering their plan to the following mandatory changes.
Source: Jdsupra.com, February 2020
In light of the Bipartisan Budget Act of 2018 that made it easier for participants to take a hardship instead of a loan, plan sponsors still have some options for mitigating 401k leakage.
Source: 401kspecialistmag.com, February 2020
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